Pier 1 2007 Annual Report Download - page 24

(1) The Company supplies merchandise and licenses the Pier 1 name to Grupo Sanborns, S.A. de C.V. and Sears Roebuck de Puerto Rico,
Inc. which sell Pier 1 merchandise in a “store within a store” format. At the end of fiscal 2007, there were 29 and seven locations in
Mexico and Puerto Rico, respectively.
(2) Total store count included 36 Pier 1 Kids stores and 26 clearance stores at March 3, 2007.
The Company’s proprietary credit card generated net sales of $355.4 million, a decrease of $67.1 million
or 15.9% from last year’s proprietary credit card sales of $422.5 million. Sales on the proprietary credit card
totaled 23.9% of U.S. store sales compared to 25.7% last year. Average ticket on the Company’s proprietary
credit card declined to $160 in fiscal 2007 compared to $163 in fiscal 2006. In November 2006, the Company
sold its proprietary credit card business to Chase Bank USA, N.A. (“Chase”). At that time, the Company also
entered into a long-term program agreement with Chase. Under this agreement, the Company will continue to
use the card as a marketing and communication tool to its most loyal customers.
Gross Profit
Gross profit after related buying and store occupancy costs, expressed as a percentage of sales, was
29.2% in fiscal 2007 compared to 33.9% a year ago. Merchandise margins, as a percentage of sales, declined
from 50.2% in fiscal 2006 to 47.9% in fiscal 2007, a decrease of 230 basis points. The decline in merchandise
margin rates resulted primarily from increased discounting and markdown activity throughout the year and an
inventory write- down of $32.5 million incurred during the fourth quarter. The inventory write-down was the
result of a strategic decision to sell off excess inventory by the end of the first quarter of fiscal 2008. Store
occupancy costs during fiscal 2007 were $303.4 million or 18.7% of sales, an increase of $12.9 million and
230 basis points over store occupancy costs of $290.4 million or 16.3% of sales during fiscal 2006. This
increase was primarily due to the deleveraging of relatively fixed rental costs over a lower sales base and an
increase in rental expense, property taxes and utility costs.
Operating Expenses, Depreciation and Income Taxes
Selling, general and administrative expenses, including marketing, comprised 40.0% of sales in fiscal
2007, an increase of 690 basis points over last year’s 33.1% of sales. In total dollars, selling, general and
administrative expenses increased $60.7 million in fiscal 2007 over fiscal 2006; $50.3 million of this increase
is summarized in the table below. Expenses that normally vary with sales and number of new stores, such as
store payroll, marketing, store supplies, and equipment rental, increased $8.5 million. These variable expenses
increased 280 basis points as a percentage of sales for fiscal 2007 compared to fiscal 2006. Marketing expense
increased $13.9 million or 140 basis points as a percentage of sales. During the year, the Company increased
both the number of different catalogs published and the circulation while maintaining its other marketing
initiatives focused on driving sales and reinforcing its brand position. Store salaries, including bonus, decreased
$3.5 million from the prior year, yet increased 120 basis points as a percentage of sales, as sales were
insufficient to leverage certain fixed portions of store payroll costs incurred to maintain minimum staffing
levels to provide quality customer service. Other variable expenses such as equipment rental and store supplies
decreased $1.9 million, yet increased 20 basis points as a percentage of sales.
Relatively fixed selling, general and administrative expenses increased $52.2 million in fiscal 2007, or
410 basis points as a percentage of sales over last year. This amount included the following items, which are
summarized in the table below. The Company recognized impairment charges of $36.4 million on long-lived
assets (including a goodwill impairment charge of $4.1 million related to Pier 1 Kids) versus $5.8 million in
fiscal 2006. The impairment on fixed assets of $32.3 million resulted from lower than expected sales trends,
which caused asset carrying values to exceed estimated future cash flows. The goodwill impairment charge
was the result of the Company’s decision to start integrating Pier 1 Kids’ merchandise into its existing Pier 1
store base by including this merchandise as an additional product assortment line and to no longer expand Pier
1 Kids locations as a stand-alone store concept. The Company recorded a $4.9 million charge for the
settlement of and legal fees related to class action lawsuits primarily regarding compensation matters in
California. Other selling, general and administrative expenses that do not typically vary with sales increased
$16.7 million, primarily as a result of settlement and curtailment charges related to retirement plans of
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